Friday, October 31, 2008

Deflation vs. inflation- Commentary: Deflation is more likely than many assume

From MarketWatch:Is the gold market sensing deflation?

It's important to ask this question, because something is most definitely bothering the gold market. Between Oct. 8 and Oct. 23 alone, for example, bullion dropped by some $225 per ounce. It dropped $15.50 per ounce on Thursday as well.

No doubt there are lots of factors that are conspiring to bid gold down. One that I mentioned in a column a couple of weeks ago is sentiment among gold timing newsletters. See Oct.16 column

I was prompted to consider deflation as another factor by recent developments in the Treasury market. That market is many orders of magnitude larger than the gold market, and its collective judgment cannot be dismissed lightly.

And right now, the Treasury market considers inflation to be a far lower threat than it was just a couple of months ago.

Consider the yields on regular nominal, Treasuries and those that prevail for the Treasury's Inflation Protected Securities, or TIPS. The primary difference between these two kinds of Treasuries is that TIPS' yields are protected against changes in the inflation rate. Theoretically, at least, this means that the difference in these yields will reflect the bond markets' expectation of future inflation....MORE